Determining the safety of a Transferable Standby Letter of Credit (SBLC) for an importer or trading company when a seller proposes this payment method isn’t a simple yes or no answer. It’s about understanding the inherent risks and benefits involved.

What is a Transferable SBLC, and Why Would a Seller Offer It?

A Transferable SBLC is a financial instrument issued by a bank to guarantee payment to a beneficiary if the applicant (the party requesting the SBLC) fails to meet their contractual obligations. The key feature of a Transferable SBLC is that the first beneficiary (typically your seller) can transfer all or part of the SBLC to a second beneficiary (usually their supplier).

Sellers might propose a Transferable SBLC for several reasons:

• The seller is a trading company, not the direct manufacturer: The seller might need to purchase goods from another supplier and wants to use the SBLC received from the importer as payment security for their own supplier (the second beneficiary).

• Reduced financial burden: The seller doesn’t need to tie up their own capital by opening a separate LC or SBLC for their supplier.

• Increased flexibility: It allows for smoother trade, especially in multi-tiered supply chains.

Safety for Importers: Benefits and Risks to Consider

For an importer or trading company offered a Transferable SBLC, careful consideration is crucial:

Potential Benefits:

• Facilitates sourcing: If the seller needs the SBLC to source raw materials or goods from another party, issuing a Transferable SBLC can streamline the seller’s procurement process, potentially leading to a quicker delivery of your goods.

• Establishes seller credibility: The fact that a bank issues an SBLC implies a certain level of credibility for the seller (as the applicant of the SBLC you receive).

• Payment guarantee: If the importer fulfills all contractual conditions, payment is guaranteed by the issuing bank.

Risks Importers Must Be Aware Of:

• Performance risk from the second beneficiary: This is the most significant risk. As an importer, you have no direct contractual relationship with the second beneficiary (the seller’s supplier). Therefore, you have no direct control over whether the second beneficiary will meet the product specifications, delivery timelines, or even ship the goods at all. If there are issues—such as incorrect specifications, late delivery, or non-delivery—you’ll have to pursue claims against your direct counterparty, the first beneficiary (your seller), which can be complex and time-consuming.

• Documentary risk:

  • Discrepancies: The SBLC’s terms are strictly defined. When the second beneficiary (via the first beneficiary) presents documents to claim payment under the TSBLC, the bank will meticulously verify their accuracy against the SBLC’s requirements. Even minor discrepancies can lead to payment rejection by the bank, causing delays or disputes. As the applicant, you might be responsible for discrepancy fees or approving the discrepancies.

  • Complexity of terms: A TSBLC’s structure can be more complex than a standard SBLC. You need to ensure you fully understand all conditions and requirements to avoid errors that could lead to financial losses.

• Limitations on transferability: Generally, a TSBLC can only be transferred once to a second beneficiary (unless explicitly stated otherwise), which might limit flexibility if there are multiple parties in the supply chain.

• Bank credibility risk: Even with an SBLC, the strength and reputation of the issuing bank are crucial. If it’s a smaller bank without a strong international standing, it could raise concerns about its reliability and ability to honor payments.

• Difficulty in amendments: Amending the terms of a TSBLC after it has been transferred can be more challenging than with a regular SBLC, as it often requires consent from both the first and second beneficiaries.